If we’re building a foundation for understanding cryptocurrency, then one would really want to start with blockchain technology. Blockchain technology is what makes cryptocurrency, or rather tracking, verifying, and recording transactions possible and, without that, crypto doesn’t exist in its current form. In short, blockchain is the foundation for the crypto market.
What is Blockchain?
If blockchain is the foundation for crypto, then we need to understand, more specifically what it is and how it works. Let’s start with the basics in that blockchain is a database, a method for storing records. However, it differentiates itself from a standard database in that it doesn’t collect all data in one place. Instead, data is collected in blocks. Each block can hold a certain amount of data, in this case, crypto transaction data, and then, once the block is full, it’s added to the chain, and a new block is started. Each block is connected to that chain thereby creating a complete ledger of all digital transactions.
The reason crypto is so reliant on blockchain is that the storage method guarantees authenticity and security without the need for a third party or centralized oversight by a governing body or organization. It’s this digital provenance, provided by blockchain, that enables cryptocurrencies to stay decentralized.
How Does Blockchain Work?
As mentioned above, the big appeal of blockchain is its ability to offer the kind of security and authenticity of fiat (currencies like dollars, etc.) without the use of a central bank or government. One of the primary mechanisms for this is that, unlike traditional databases, blockchain data cannot be edited, deleted, or destroyed, only recorded. As a result, once a transaction occurs and has been verified, the record stays in perpetuity. We’ll look at this a bit more closely as we look at how blockchain records, verifies, and stores crypto transactions.
Understanding Blockchain and Crypto
So we know now that blockchain is a distributed digital ledger used to record transactions. How does the blockchain work with crypto exactly?
Let’s walk through it. A transaction (buying, selling, or trading) of a cryptocurrency is initiated by a user. That transaction is then sent out via a peer-to-peer network of computers all over the world (decentralized). The computers then analyze algorithms and the crypto codes (secret keys) to confirm the transaction. This is also referred to as mining or as “proof-of-work.” This work is where crypto gets a reputation for requiring a lot of energy and computing power.
Once there is verification, the transaction is deemed complete and stored on the block. Once that block is full, it’s chained to the rest, creating an ongoing digital ledger of all transactions. The entire process from transaction to verification creates an immutable record and, again, this is what lends crypto exchanges their security and credibility.
Blockchain and Cryptocurrency Statistics
As with any technology, particularly one that disrupts standard institutions or the status quo, like cryptocurrency, adoption statistics are particularly interesting. For example, as of 2022, there were 81 million wallet users created on blockchain.com which enables Bitcoin. That doesn’t include other wallets, other exchanges, or other coins. In other words, while the number is impressive, it doesn’t cover all the crypto wallets created.
In fact, as of 2022, there are an estimated 10,000 coins on the market. However, because creating a coin is fairly simple, many of those may be of little consequence and not traded widely. That said, never underestimate the power of the market to change things. Dogecoin, for example, started as a joke, then gained significant traction joining some of the better known and more frequently traded coins.
The block records a variety of data including (but not limited to):
- Block number- As each coin has its own native blockchain, the block number reflects the full length of that coin’s chain.
- Base Fee Per Gas- The minimum fee for a transaction to be included in the block.
- Difficulty- How hard was it to mine the block (proof-of-work)?
- Hash- A unique identifier for the block.
- Parent Hash- The identifier for the preceding block.
- Transactions- Details the transactions on the block.
Each coin has its own native blockchain, so each blockchain is of a different length. For example, in 2020, Ethereum, the block for Ether, was 10 million blocks long.
At the end of 2021, the global cryptocurrency market cap was over $3 trillion. In April of 2021, it hit $2 trillion for the first time which means there was a significant increase and jump in crypto assets in the latter half of 2021.
The global cryptocurrency market is expected to grow significantly in the coming years, reaching $2.7 billion by 2025 with a growth rate of nearly 14%.
Further, it’s worth noting that even traditional banking is beginning to look at the technology, as are other industries. Many believe blockchain technology can be used for the storage of more than just financial transactions and see significant potential for its use across many industries.
For many, just the term blockchain, along with other cryptocurrency vocabularies, is confusing. Given that there’s so much to learn about cryptocurrency and how it works, hopefully breaking it down to the basics, and foundational technology is helpful.
If you’re looking for more help in understanding cryptocurrencies or looking to explore how you can get started, get in touch with the PayBolt team and let us help you get started setting up a wallet, purchasing coins, and spending them at all your favorite retailers.